Thoughts after an Association of Superannuation Funds Australia lunch

If the Government raise compulsory super contributions from 9% to 12%, it will simply subsidise higher income earners' retirement by foregoing taxes at a ridiculously high level and overtaxing those on lower incomes.

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There were 300 members of the super industry at the Association of Superannuation Funds Australia lunch, in the big city hotel for their “great debate” on whether the Government should raise compulsory contributions from 9% to 12%. The industry wants the rise but the interim Henry report suggested that current contributions were enough to give an adequate base to this pillars, with the age pension and own savings, of retirement income. I was the wild card, the only non super industry member of the panel and a serious long term critic of the basic inequities of system.

My main criticisms is that super subsidises higher income earners’ retirement by foregoing taxes at a ridiculously high level and overtaxes those on incomes below $32,000. So adding another 3% was basically adding insult to injury. The industry people are not bad people but it was hard for the 300 there to consider the ill effects of raising the contribution because it’s against their interests: they make more money if they manage more funds, and most would personally benefit from the inequities of the current tax advantages to higher income earners. There are a few dissidents in their ranks and one was part of the panel, but these find their positions uncomfortable.

How can we stop a bad policy move, if the well heeled super industry (45% of the finance sector) and the ACTU combine to promote it? Try evidence! So here are some of the points that were raised by me and other panel members.

The current system of a flat 15% tax on contributions and earnings is unfair to those who pay less on their income. (all agreed something needed to be done to fix this).

Current tax concessions massively went to the better off (top 5% got 40% of gains) (all agreed but less enthusiasm for fixing it).

We need and will retain the aged pension because 70 % will still draw on it by 2050 ( all agreed but believe its inadequacy pushes investment in super so not advocates for a big rise.)

There were many unpredictable risks ahead and it was hard to assess what would be needed by very diverse population groups (agreed but divided on what this meant).

There was little agreement about the following:

9% would be enough ( Andrew Boal and me).

It would be bad for lower income people who could not afford more savings. One panel member though everyone surely could afford $15 a week, and has obviously never had problems meeting basic living costs. (Andrew Boal and me).

Pooling resources to deal with unforeseeable risks was preferable to forcing people individually to save more (me, mainly.)

Forcing people into savings was the nanny state and could crowd out some alternate saving options, e.g. buying a home, having kids.(I never thought I’d use free market arguments against the finance industry!)

We can’t afford our ageing population (the other 2 plus most of audience which ignored OECD data that showed we were low spenders and could manage the population costs.)

I also raised wider questions on why privilege retirement income saving over other life time demands for time out and earning. The superannuation push for funding retirement suggests pre-retirement is a time burdened rat race so most pleasure and leisure will only be possible, post retirement. Ergo people are not encouraged to allocate both time and money over the life course but are pressured to ever more contributions to their “retirement” funds despite no consumer group pushing for higher contributions. Workers don’t push to have 3% of their incomes diverted. (Note, the unions are not impartial advocates in this area as they too run funds).

Does the move to privatise/individualise retirement income make it harder to get public support for decent pension rises? As more people see themselves, usually fallaciously, as self funded retirees, they may show less empathy towards those dependent on pensions. Certainly, except for the last budget rise for single pensioners, most recent extra public funding of retirement has gone in concessions for those on higher incomes.

What is needed is encouragement for savings to be used for life cycle redistribution to deal with other cost pressures that need to be addressed. Younger people need income to pay education debts, save for deposits for housing, for the costs of child bearing and rearing. We need time out of the workforce to care, take sabbaticals or deal with crises. This doesn’t happen if there are only sequestered funds with limited capacities to be drawn before age 60.

Watch this space to see whether this lobby succeeds in changing Henry’s mind!

Thanks for your article Eva, I tried to post earlier but the gremlins attacked.

Thanks for representing those workers who are not working for large organisations from age of 35 until retirement age. From a quick reading of the Superannuation System Review paper for submissions says that 5 million workers are employed in businesses employing less than 20 people. The sections of submission paper that are concerned about casual, part time workers with multiple employers are

6.1.1 setting up a Central Clearing house to collect superannuation contributions at same time as PAYG will make it possible for employers to pay contributions to your choice of super fund. At the moment many workers contribute to employer nominated super fund or don’t get rostered on.

6.2.2 setting up a national default account for employees of small business. This would reduce discrimination against older workers as the incentive to fire/retrench workers who have a big claim on the firm’s pension fund disappears.

6.4 the money in Inactive Accounts. Financial institutions should stop sending out member statements in envelopes marked ‘Do Not Readdress’ as Australia Post returns these to the sender, and the financial institutions never update their records to show member is lost, thus they keep sending out statements year after year after year

9.3.7 flipping non-contributing members to personal plans. The retrenched worker has a 51% chance of never working again, is pushed into a punitive super plan, can’t access their super and probably has too many assets to get Newstart. Its an ugly position that many older Australians find themselves in until they can access the Aged Pension or their Super.

Possibly 2 to 3 million workers might be able to save for their old age through the current superannuation system run by banks and insurance companies. The other 7 – 8 million workers pay their super contribution and watch it get eaten by fees. Women predominate in the lower paid

Having worked for the largest manager of superannuation funds I can assure you they are not smarter managers or more efficient than government funds or UniSuper. They employ mediocre people who haven’t got the education or experience to buy or build good back office and computer systems. I think this problem is endemic in Australian insurance houses.

Agreed that nine percent should be adequate. I have done a great deal of mathematical modelling of superannuation, subject to rigorous audit, and find that someone with a long period of employment, who invests in a low fee product (in both the accumulation and retirement phases), and who is not distracted by short term volatility, will have a higher income post retirement than pre retirement.

The push for higher contributions is undoubtedly coming from high fee funds, who can rightly demonstrate that higher contributions are needed, when up to 40 percent of earnings are consumed by fees.

Also, they can exploit investors’ conservatism, for, in response to the GFC, many investors are becoming excessively conservative, not realizing that irrational conservatism can be just as costly as irrational exuberance. Nine percent is quite inadequate for a “capital stable” or similar product, but, rather than increasing the levy, we need some investor education about volatility — that the volatility of a higher growth fund is not costly over the long run.

Another issue that demands policy attention is the bundling of life insurance with superannuation, drawing funds away from retirement savings. Life insurance was a useful product fifty or a hundred years ago, when a male breadwinner was the sole source of household income. It may still be a good product for those periods when one has a young family and a large mortgage. But for older and younger workers, it is a fairly useless product. It should be separated from superannuation, and not privileged witht tax breaks given to superannuation.